Turkey Clears the Way For Azerbaijani Gas Transfers

Turkish Prime Minister Recep Tayyip Erdogan and Azerbaijani President Ilham Aliyev have co-chaired the first meeting of the High-Level Strategic Cooperation Council (HLSCC) in Turkey’s Aegean city of Izmir. The HLSCC, which follows on the partnership model Turkey has been seeking to develop with neighboring countries, most notably Iraq, Syria, Russia and Greece, was established last year as a means to further bilateral relations. The HLSCC essentially took the form of a joint cabinet meeting bringing together ministers from both sides, including the ministers of economy, transportation, energy and foreign affairs. In addition to discussions on economic issues, both parties also signed agreements to further cooperation in communications, education of the police, promote investment, and family and social policy (Anadolu Ajansi, October 25).

Both the timing and the venue for the event had broader symbolic value, underscoring the evolution of bilateral relations since the fall of the Soviet Union. The HLSCC was held around the time when the two countries were celebrating the twentieth anniversary of the establishment of ties since Azerbaijan gained independence. In this context, there have been various activities organized in both countries in order to not only commemorate that historical moment but also to raise awareness about each other. Especially in Turkey, there have been various activities under the banner of “Azerbaijan week.” In this way, both sides seek to overcome what they see as a major obstacle before the further improvement of ties: i.e., the mutual lack of understanding about the other country, despite the highly inflated rhetoric of brotherhood.

The choice of Izmir was important, because the two leaders also attended a ceremony to launch a $5 billion investment decision (Zaman, October 25). The State Oil Company of the Azerbaijan Republic (SOCAR) and its Turkish partner, Turcas, agreed to build a refinery, scheduled to come on stream in 2015. SOCAR, which earlier purchased Turkey’s petrochemicals giant Petkim through a privatization tender, will control 75 percent of the shares in the new joint venture. The refinery, which will be the largest single private sector investment, is said to bring many benefits to Turkey. The inflow of further investments into the Turkish economy at a time of serious concern over the sustainability of the high current account deficit is welcomed by the Turkish authorities. Moreover, with its capacity of 10 million tons annually, the refinery will enable Turkey to produce domestically LPG and other petrochemicals of which it is currently a net importer, further helping control the current account deficit. Equally, the massive investment is expected to create thousands of temporary and permanent jobs in a region, where traditionally the governing AK Party had encountered problems in expanding its electoral support, which might also be welcome news for Erdogan’s domestic political agenda. Overall, this development marks yet another step in the growing visibility of Azerbaijani capital in Turkey’s energy sector, highlighting the multi-layered nature of bilateral relations.

Following the HLSCC meeting, the two leaders also signed the long-awaited inter-governmental deal on Shah-Deniz Phase Two. The agreement, which regulates the conditions and volume for both Turkey’s purchase of natural gas from Shah Deniz’s second phase and the transfer of Azerbaijani gas to Europe through Turkey, has long been delayed. Azerbaijan was eager to see its finalization, as Baku will be able to sell gas directly to European markets. After the clarification of the transit terms, Baku will be in a position to consider more realistically the proposals made by the various alternative pipeline projects seeking to transport gas to Eastern or Southeastern European markets: namely, Nabucco, ITGI, and TAP. For Turkey, the agreement will be the first gas transit agreement, serving as a major step to advance its aspirations to become an energy hub (Zaman, October 25).

However, Erdogan declined to comment on the details of the project, saying that they would be worked out by the relevant energy officials from both sides in the coming months. Also in the past, when these parties came very close to concluding a deal, they always deferred it for further talks on the remaining details. It remains to be seen whether this time further discussions will indeed occur or are only a matter of technicality or used as a cover to hide substantial disagreements remaining below the surface.

Turkey’s Energy Minister Taner Yildiz explained later that Turkey would buy 6 billion cubic meters (bcm) of gas from Shah Deniz Phase Two, for which it will retain re-export rights, while also allowing the transfer of 10 bcm of Azerbaijani gas to Europe (Aksam, October 28). Yildiz also added that the price mechanism for Turkey’s gas imports from Shah Deniz Phase One was modified to allow for a fixed price. In yet another thorny energy issue that had long remained unresolved, Yildiz announced that both parties decided to revise the operating terms for the Baku-Tbilisi-Ceyhan (BTC) pipeline which enables the marketing of Azerbaijani oil to world markets.

Turkey, as the operator of the BTC, has incurred losses, which it claimed was due to the unfavorable conditions it had originally agreed. In fact, this “bitter experience” partly explains why Ankara has been so careful about the details of transit terms for Azerbaijani gas exports, which delayed the negotiations on Shah Deniz Phase Two. With this new deal, Turkey’s past losses from operating the BTC will be compensated, as well as introduction of a new mechanism to allow more favorable operating terms.

In a move that reflects not only the spirit of brotherhood and solidarity but also Erdogan’s efforts to put Baku at the center of Ankara’s South Caucasus policy, references to the Karabakh conflict were often made during the public addresses by the two leaders. Erdogan went so far as to say that Turkey would stand shoulder by shoulder till the occupation of Karabakh ends. Earlier, Turkey had stalled the process for the normalization of diplomatic relations with Armenia after objections from Baku. It appears that as its multi-dimensional partnership with Azerbaijan unfolds, which pays many economic and political dividends, Ankara might have few incentives after all to reconsider its position that normalization of relations with Armenia is conditional on progress over the Karabakh issue.